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Save Your Energy and Money—Don't Fall for Energy Stock Scams

If the traffic on fax machines and in email boxes across the nation is any indication, life is pretty easy. You can get a college degree without setting foot in a classroom, travel to popular vacation destinations for next to nothing, or make a quick and handsome profit investing in oil, gas, or alternative energy stocks.

A combination of factors—including global warming, a ravenous worldwide hunger for energy, rising gasoline and fuel oil prices, and instability in the Middle East—has sparked investor interest in energy and alternative energy stocks. But these same factors also appear to have fueled a rash of energy-related stock scams.

There are legitimate and not-so-legitimate ways to invest in companies that produce energy. We are issuing this Alert to warn investors about fax, email and even cell phone text message scams that promise high returns in exchange for little risk—and to provide information on how to invest wisely in this or any other sector.

Energy Scams Start with a Blast of Hot Air

Like so many other fraudulent schemes, energy stock scams typically involve the touting of a small unknown company, using a combination of baseless price predictions, misrepresentations, and hyperbole. The goal of these scams is not to make you money, but to pump up the price of the stock through false and misleading statements that create unwarranted demand for the company's shares. The con artists behind the scam can then sell off their shares, leaving investors with worthless stock.

"It is easy to conclude that everyone should have an alternative energy stock in their portfolio," reads one fax. "Put [company name] on your radar screen today, as it is about to take off!"

Tempting?

Well, get a magnifying glass and read the small print at the bottom of the page. "The securities discussed herein are for high-risk individuals only and not for the general public."

And, "[faxing company's name] was paid $500,000 for the distribution of this report."

In a spam message, another outfit trumpets that a certain Texas energy firm has "teamed up with China's $23 billion oil monopoly," and huge returns are in store for those with the wisdom and foresight to invest "RIGHT NOW!"

"If you have $5,000 in the S&P 500 and you ride it out for the rest of the year, you'll walk away with $5,700," the spam reads. "But put that $5,000 into this Texas dynamo and you'll stuff your pockets with $26,500 in as soon as four months."

Not all energy investment pitches are as over-the-top as this, and some are legitimate. We can't help you decide whether or how to invest in this sector, but we can help you sort the wheat from the chaff where unsolicited fax or email investment pitches are concerned.

How to Avoid Being Scammed

One sure-fire way to avoid being taken in by an unsolicited fax or email is to ignore it. To steer clear of potential scams, follow these tips.

Consider the source. Never rely solely on information you receive in an unsolicited fax or email. It's easy for companies or their promoters to make glorified, unsubstantiated claims about new products, lucrative contracts, or the company's revenue, profits, or future stock price.

Always ask: "Why me?" Another tip-off that you're potentially being scammed is that the message is unsolicited, which raises the obvious question: Why would a total stranger tell you about a really great investment opportunity? The answer is that there is no such opportunity. In many email and fax scams, those who tout the stock are corporate insiders, paid promoters, or substantial shareholders who profit handsomely if the company's stock price goes up.

Exercise some skepticism. Con artists are very adept at making their pitches appear real. Be extremely wary of any pitch that suggests immediate pay-offs, especially if the investment involves a start-up company or a product or service that is still in development. Even technologies that show promise might be years or decades away from entering the market.

Find out where the stock trades. Most unsolicited spam recommendations involve stocks that cannot meet the listing requirements of a major national exchange, such as The Nasdaq Stock Market or the New York Stock Exchange. Instead, these stocks are usually quoted on the OTC Bulletin Board (OTCBB) or in the Pink Sheets. There are important differences between the OTCBB and the Pink Sheets and The Nasdaq Stock Market or a stock exchange.

There are no minimum financial and other quantitative standards that must be met by a company to have its securities quoted on the OTCBB or in the Pink Sheets, though OTCBB issuers must remain current in their filings with the SEC or applicable regulatory authority. Many Pink Sheet companies, on the other hand, have no obligation to file annual or quarterly reports or to publicly disclose current material information.

Many of the securities quoted on the OTCBB or in the Pink Sheets don't have a liquid market; they are infrequently traded and can jump up or down in price quickly. This can make it difficult to sell your security later.

Read a company's SEC filings, if available. Most public companies file reports with the Securities and Exchange Commission (SEC). Check the SEC's EDGAR database to find out whether the company files with the SEC. Read the reports and verify any information you have heard about the company. But remember that just because a company has registered its securities or has filed reports with the SEC, it doesn't mean that it will be a good investment.

Be alert to changes in the company's name and trading symbol, reported through SEC Form 8-K. Stock promoters often change a company's name and trading symbol in an attempt to align it more closely with a current event or issue.

Check out the person touting the stock. A legitimate investment salesperson must be properly licensed, and his or her firm must be registered with the Financial Industry Regulatory Authority (FINRA), the SEC or a state securities regulator—depending on the type of business the firm conducts. To check the background of a brokerage firm, broker, investment adviser firm or representative, use FINRA BrokerCheck. Also, be sure to call your state securities regulator. You can find that number in the government section of your local phone book or by contacting the North American Securities Administrators Association (NASAA).

If you're suspicious about an offer or if you think the claims might be exaggerated or misleading, please contact us. You may also contact the FCC, which has jurisdiction over junk faxes, including investment-related faxes. The Telephone Consumer Protection Act of 1991 (TCPA) and FCC rules prohibit sending junk faxes to homes and offices.

Be cautious with limited partnerships. Instead of pumping individual energy stocks, some con artists tout interests in fraudulent oil and gas limited partnerships. Popular in the mid 1980s-and often resurging whenever oil prices rise-oil and gas limited partnerships can be legitimate investments. On the one hand, they offer tax advantages and the potential for periodic cash distributions or long-term capital gains. On the other, they tend to be highly speculative and illiquid, meaning you can't easily sell the investment to get your money back out.

If you are considering investing in an oil and gas limited partnership, be sure to read the alerts issued by the SEC and NASAA, listed in the additional resources below.